Income Tax Appellate Tribunal - Ahmedabad
Pradip N. Desai, Ahmedabad vs Department Of Income Tax on 4 April, 2008
IN THE INCOME TAX APPELLATE TRIBUNAL : 'A' BENCH : AHMEDABAD
(Before Hon'ble Shri T.K. Sharma, J.M. & Hon'ble Shri A.N. Pahuja, A.M. )
I.T.A. No. 2488/AHD./2008
Assessment Year : 2005-2006
Assistant Commissioner of Income Tax, -vs.- Shri Pradip N. Desai, Navrangpura
Circle-7, Ahmedabad (PAN : AAQPD 0142 A)
(Appellant) (Respondent)
Appellant by : Shri R.K. Dhanesta, D.R.
Respondent by : Shri K.P. Shah, A.R.
ORDER
Per Shri T.K. Sharma, Judicial Member :
This appeal filed by the Revenue is against the order dated 04.04.2008 of Learned Commissioner of Income Tax (Appeals)-XI, Ahmedabad deleting the addition made of Rs.30,51,000/- on account of disallowance under section 14A of the Income Tax Act, 1961 for the assessment year 2005-06.
2. Briefly stated the facts are that the assessee is an individual. For the assessment year under appeal, he filed the return of income declaring total income of Rs.26,06,934/-. The Assessing Officer framed the assessment under section 143(30 on 31.10.2007 at a total income of Rs.71,08,699/-. In this assessment order, the Assessing Officer disallowed, inter alia, Rs.30,51,100/- under section 14A of the Income Tax Act, 1961.
3. On appeal, before the Learned Commissioner of Income Tax(Appeals) the assessee made the following submissions :-
"In addition to the statement of facts submitted alongwith the grounds of appeal I hereby further submit as under:
The Jt Commissioner of Income Tax has arbitrarily and without any base disallowed u/s 14A the interest of Rs. 30,51,100/- out of interest of Rs.34,75,704/- paid by M/s V.B. Investments to sharafi depositors whose money was given as sharafi loan to different parties.
As a matter of fact interest of Rs. 34,75,704/- has been incurred in relation to only Sharafi business.2
ITA No. 2488-AHD-2008 From the facts it has been proved that separate personal books of accounts have been maintained for the exempt income and the A 0. had not proved the nexus of interest of Rs. 30,51,100/- with exempt income I rely on the following decision.
Wimco Seedlings Ltd. V. Deputy CIT 293 ITR (AT) 216 (Delhi) The Hon'ble Tribunal has held as under ( on page 216 and 217):
"Only expenditure which has been proved to have been incurred in relation to the earning of tax free income can be disallowed u/s 14A of the Income Tax Act, 1961. The word "incurred" refers to the factual spending of the expenditure in relation to the exempt income and does not refer to a deemed or assumed spending for the purpose.
Not only the incurring of the expenditure but also its relation to the exempt income must be clear and must be capable of being ascertained on the face of it without involving any further mental exercise The burden is on the A.O. not only to show that some expenditure was factually incurred but also to show its relationship with income exempt from tax."
The A C.I.T., Circle-7, Ahmedabad in his letter, referred as above as submitted as under :-
"So far as the second issue of addition made on account of disallowance u/s, 14A is concerned, it is stated that the disallowance is made on the proportionate expenditure on account of interest relatable to the exempted income which was amounting to Rs. 15,12,713/- as against Interest income of Rs. 17,73,228/-. Assesses has never taken any plea that the separate books of accounts have been maintained for exempted income and has also not produced such books of accounts before the A.0. during the course of assessment proceedings. Further, the A.O. in his order at para-1 on page-6 has clearly shown the relation of such exempted income with the expenditure on interest In view of the above discussion and on facts of the case it is humbly request to confirm the addition and reject the assessee's plea".
4. After considering the aforesaid submissions, the Learned Commissioner of Income Tax (Appeals) deleted the addition on the ground that the Assessing Officer has not proved that the assessee had borrowed loans by paying interest on the said loans to make investments in tax free bonds and shares. The Learned Commissioner of Income Tax(Appeals) further observed that investments made by the assessee were from capital account of the assessee, which are accumulated profits of the assessee. On this basis, he deleted the addition of Rs.30,51,000/- made by the Assessing Officer under section 14A of the Income Tax Act, 1961. Aggrieved with the 3 ITA No. 2488-AHD-2008 order of Learned Commissioner of Income Tax(Appeals), the Revenue is in appeal before the Tribunal.
5. At the time of hearing before us, on behalf of revenue Shri R.K. Dhanesta, ld. D.R. appeared and relying on the judgment of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. -vs.- DCIT & Another reported in [2010] 328 ITR 81 (Bom.) contended that the matter be restored to the file of Assessing Officer for making reasonable disallowance.
6. On the other hand, Shri K.P. Shah, ld. counsel appearing on behalf of the assessee vehemently supported the order of Learned Commissioner of Income Tax(Appeals). The ld. counsel of the assessee submitted as under :-
1. Pradip N.Desai is assessed to tax since last more than 30 years.
2. Investments made in the Equity Shares, Govt. Securities, Mutual Funds etc are shown in the personal Balance Sheet as on 31/03/2004. The said investments have been made by P.N. Desai out of his personal wealth.
3. During the year new investments in purchase of Equity Shares of Rs.7,65,408/-, Mutual Funds of Rs.31,86,995/- and Govt. Securities Rs.11,00,000/- were made only from his individual wealth and the payment of such investments is made only from his personal Bank Accounts.
4. M/S. V.B. Investments was a partnership firm in which P,N, Desai was one of the partner. As on 31.03.2004, the firm was dissolved and the business with all the assets and liabilities was taken over by Shri P.N. Desai I.e. the entire Balance-sheet of the firm had became the Balance-sheet of M/S. V.B. Investments (Proprietor : P.N. Desai)
5. As per the Balance-sheet of M/s. V,B, Investments, unsecured loan of Rs. 297.32 lakhs represents the advances made to different parties. Moreover loan of Rs.112.73 lakhs was also advanced to different parties from the capital of P.N. Desai. Thus, total advances to the parties during the course of the business is Rs.410.05 lacs.
The parties from whom unsecured loan of Rs. 297.32 Lakhs had been taken are paid interest of Rs, 34,75,704/- and the Interest of Rs. 52,08,932/- is received from the parties to whom Loans are given. Thus there is direct nexus of payment of interest of Rs.34,75,704/- to sharafi business only.
In nutshell, there Is no diversion of funds to the Proprietor. On the contrary the capital of Rs. 112.73 lakhs of the Proprietor P.N.Desai is utilized for giving loans during the course of the business.
6.1. On the basis of the aforesaid submissions, the ld. counsel of the assessee argued that since the assessee has not invested borrowed money in equity shares, Government Securities, 4 ITA No. 2488-AHD-2008 Mutual Funds, etc., therefore, the Learned Commissioner of Income Tax(Appeals) rightly deleted the addition of Rs.30,51,000/-, which was made by the Assessing Officer on doubts and suspicion.
7. Having heard both the sides, we have carefully gone through the orders of authorities below. It is pertinent to note that the assessee was a partner of M/s. V.B. Investments, a partnership firm. On 31.03.2004, the said firm was dissolved and the business with all the assets and liabilities was taken over by the assessee. As per Balance-sheet of M/s. V.B. Investments, unsecured loan of Rs.297.32 lakhjs represents the advances made to different parties. Moreover, loan of Rs.112.73 lakhs was also advanced to different parties from the capital of assessee. Thus the total advances to the parties during the course of the business were Rs.410.05 lacs. The unsecured loan was of Rs.297.32 lakhs, on which the assessee has paid interest amounting to Rs.34,75,704/-. As against this, the assessee has received interest of Rs.52,08,932/- from the parties to whom he has given loan of Rs.34,75,704/- in his Sharafi business. In these circumstances, we are of the view that the Learned Commissioner of Income Tax(Appeals) is legally and factually correct in deleting the disallowance of Rs.30,51,000/-, which was made by the Assessing Officer by invoking the provisions contained in section 14A of the Income Tax Act, 1961 on doubts and suspicion. We, therefore, incline to uphold the order of Learned Commissioner of Income Tax (Appeals).
8. In the result, the appeal filed by the Revenue is dismissed.
The Order was pronounced in the Court on 28.12.2010.
Sd/- Sd/-
(A.N. Pahuja) (T.K. Sharma)
Accountant Member Judicial Member
DATED : 28 / 12 / 2010
Copy of the order is forwarded to :
1) The Assessee
(2) The Department.
3) CIT(A.) concerned, (4) CIT concerned, (5) D.R., ITAT, Ahmedabad.
True Copy By Order Deputy Registrar, ITAT, Ahmedabad Laha/Sr.P.S.